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From a near-term perspective, it appears the sideways consolidation phase continues for the broad market while the NASDAQ just keeps on keepin' on. And with the Comey firing causing a stir in D.C., it isn't a stretch to assume that the sideways action could stick around awhile.

From a bigger picture standpoint, the question at hand is whether or not the bulls will be able to break out of the trading range that has been in place for nearly 11 weeks. For clues to the answer in situations like these, I like to look at the macro backdrop, the historical tendencies, and my market models.

So, with the markets quiet so far this morning, I'd like to do a quick and dirty, back of the napkin, type of review of the current market situation.

The Macro View

From a macro perspective, I'm of the mind that it is fairly easy to argue both sides at this time. In short, the bulls are betting on blue skies ahead thanks to policy initiatives such as tax reform while the bears point to valuations and the idea that the economic data doesn't support current levels seen in the market.

From my perch, the bulls would seem to have a slight edge here. Earnings are rising. The jobs market is strong, etc. However, at some point - and the timing is always the hard part - expectations will need to turn into reality. In other words, the hoped-for macro improvement will need to show up in both the economic data and the "E" in the market's P/E ratio. Thus, the bulls would appear to have a limited amount of rope to work with here because hope can only take markets so far.

Taking a step back even further, I would be remiss if I did not recognize that perhaps the biggest macro factor at the present time is that the stock market remains in a secular bull phase. As such, (a) I've learned that the bulls should be given the benefit of any doubt, (b) the dips should be bought, and (c) any bearish action is likely to wind up in the short and shallow category.

Sell in May and Go Away?

Next, let's look at the historical tendencies of the markets for clues as to what might come next. There are actually two considerations here, the cycles and the "Sell in May" idea.

Sell in May and go away. It's one of Wall Street's most popular clichés. And while my memory bank suggests that this tends to be of those rules that works when it works, history shows there is some validity to the approach.

To review, the idea here is to buy stocks on November 1 of each calendar year and then sell to cash on May 1 of the following year. According to the computers at Ned Davis Research, if one had implemented such a strategy, a hypothetical investment of $10,000 beginning in 1950 would have grown to $699,220 before any fees and/or trading costs by the end of 2016. Not bad, eh?

On the other hand, if one had invested $10,000 in 1950 and done the opposite (buying on May 1 and selling on October 31 each year), the hypothetical account would be worth... wait for it... $8,604 at the end of 2016. Ouch.

Therefore, it would appear that the "Sell in May" rule might be a good one. However, my caveat would be to implement such a game only if one has a 60+ year time horizon AND if stocks are in a secular bear cycle. In short, my take on the historical data is this is when such a plan works the best.

At the same time, it is worth noting that the markets have not performed particularly well during the May - October period in the current secular bull cycle. While there has really been no reason to "sell" in May, I note that since 2009 (when the current secular bull began), the S&P 500 has averaged gains of 3.96% during the May - October period and 9.56% in the November - April period.

In addition, the S&P has declined during 3 of the last 8 years from May through October and only once during the November through April time frame. And finally, it is worth noting that the gains seen during the November - April periods have been substantial, with 5 of the 8 occurrences seeing double digit returns.

The takeaway here is that while the calendar would seem to favor the bears in the coming months, the historical odds suggest the idea of buying any dips experienced during the "Sell in May" period.

Tomorrow, we will conclude my back-of-the-napkin review by looking at what the cycle composite projects for the remainder of the year and get to the bottom line of what the models are telling me right now.

Thought For The Day:

Find the good. It's all around you. Find it, showcase it & you'll start believing in it. -Jesse Owens

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of Trump Administration Policies
      2. The State of the U.S. Economy
      3. The State of Earning Season
      4. The State of World Politics


Wishing you green screens and all the best for a great day,

David D. Moenning
Chief Investment Officer
Sowell Management Services

Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.

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